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A recently signed agreement between China and Thailand sheds light on the dynamics of the Maritime Silk Road.

Amid all the fanfare and media buzz about China’s re-envisioning of its two Silk Road projects, the New Silk Road and the Maritime Silk Road, admittedly little is known about the details, the mechanics, and the functions of the new routes. For example, this interactive graphic published by Xinhua suggests the Maritime Silk Road’s prime focus is to facilitate trade between Asia and Europe when in actuality the focus of the Maritime Silk Road is to support and facilitate booming trade growth between Asia and Africa. To put this into perspective, from 2011 to 2013, trade between China and the EU showed no increase, keeping steady at around USD 530bn. This was outpaced by trade growth between China and Africa which expanded at an average of 10% per year over the same period of time and is projected to increase 15-20% per year over the next five years. In 2013 total trade between China and Africa reached USD 210bn – five years ago China’s total trade with Africa was less than half of what it is now.

Despite China’s increasing trade prospects with Africa, China alone cannot orchestrate the construction of the Maritime Silk Road. Rather, China needs to link up with key partners in Southeast Asia who will provide both strategic port facilities and export goods, like Thai rice, alongside of Chinese goods to growing markets in Africa, the Middle East, and South Asia.

One way to understand the Maritime Silk Road is to envision a network of exporters formed of commercial interests from China and advanced economies in Southeast Asia sending manufacturing and food exports to Africa’s growing markets while importing valuable minerals and metals from African trading partners. This network’s ocean bound cargo fleet’s ships, whether coming or going, are never empty, and China, sitting at the helm of this network, receives the lion’s share of income and resources from trade.

To demonstrate the importance of African markets as a key player in the designs for the Maritime Silk Road, last month Chinese and Thai officials agreed to construct investment vehicles for the development of 12 strategic ports which will receive and distribute cargo shipped along the Maritime Silk Road. Seven of these ports are located on Africa’s coastlines.

The idea is that these ports, collectively known as Strategic Maritime Distribution Centers (SMDC) will service the main commercial fleet coming from Asia, and each port will have its own secondary fleet of smaller coastal vessels to distribute to secondary ports. The SMDCs are located close to large population centers with reliable road systems for distribution to local and regional markets. For example, the Libreville port in Gabon, Africa’s 4th most developed country with a per capita GDP of more than 11,000 USD, will serve as a distribution center to neighboring Cameroon, the Congo, and Nigeria to the north. Note Africa’s largest economies such as Nigeria, South Africa, and Egypt are not in the picture. In these countries, China is often perceived as a competitor.

So why can’t China be the sole force behind the construction of the Maritime Silk Road, and what’s in the deal for Southeast Asian exporters? On average, China enjoys a 20% trade surplus with Africa – in other words, China takes more than it can give to Africa. This imbalance suggests that if China went at this alone, its Africa-bound ships would be partially empty on the way to Africa and full on the way back. Like China, the African continent has become an net food importer. Conversely, Southeast Asia is a net food exporter with Thailand, Vietnam, and India trading off year to year for the position of world’s top rice exporter. The extra space on the westbound cargo ships can easily be filled by Africa’s demand for rice from Southeast Asia.

In 2013 more than 60% of Thailand’s rice exports went to Africa, and the chart above shows that more than half of top importers of Thai rice are African countries (circled in blue boxes). The May 23 coup d’etat in Thailand spelled the end for former prime minister Yingluck Shinawatra’s domestic grain purchasing plan which saw her government paying above market prices to domestic rice producers in a ploy that hoped to both bring on a spike in global rice prices secure votes from a populist electorate. With Thai rice out of the storehouses and back on global market, this year will see a 35% increase in Thai rice exports. The first six months of 2014 Thai rice exports to Africa show a 40% increase over the first six months of 2013 jumping to 3.29mn tons from 2.8mn tons respectively. The Chinese government sees the current military dictatorship government providing a fast-track opportunity to circumvent democratic political processes in Thailand and further map out the blueprint of an emerging Sino-Thai trade alliance vis-à-vis the SMDC.

With all the talk of the Asian Infrastructure Investment Bank (AIIB) during last week’s APEC meetings and suggestion by many sources that the AIIB will serve as the main broker of the Silk Road projects, sources close to me suggest that much of the investment poured into the forming the Maritime Silk Road primary and secondary fleet will be from private investment groups. One of the chief negotiators for the Thai side during the meetings last month represented a US backed investment group, and representatives for the Chinese side suggested that in order to improve China’s soft power image abroad and the quality of Chinese investment overall, the next wave of infrastructure development out of China will come from private investment formation. The Chinese negotiator compared this coming trend in terms similar to the US’s investment expansion of the 2nd half of the 19th century which ushered in the construction of the US rail system – perhaps he should check his history books as this period is commonly viewed as the most corrupt era of US historical development and European opinions of Americans at that time were at an all time low. Yet this shift into private investment is loosely rationalized by Beijing’s plan to turn Yunnan province into a regional financial hub. Yunnan and Fujian provinces share the burden of developing the Maritime Silk Road.

So how can Yunnan, a landlocked province, shoulder the responsibility for success in building the Maritime Silk Road? Discussion forthcoming in my next post.

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I love to travel and get away from it all whether it's 1st class, 2nd class or 3rd class makes no difference to me. I simply love to visit new places and meet new people. I really enjoy extreme sports. I started blogging ten years ago and love to be able to express and share thoughts with others.
Most recently a Mortgage Professional prior to implosion. Earned a living in my previous career as an Institutional Equity Trader (sell side). I have a bachelor's degree in finance with special emphasis in economics.

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